Every progressive country has, therefore, deliberated long and hard on an industrial vision. Typically, creating a balance of import substitution, export-based and strategic industries has been a focus for policy makers. A successful combination strengthens the economy.
The export industries provide the necessary cushion in the country’s reserves. Import substitution industry saves foreign exchange while strategic industries create employment, transfer technology and generate much needed value addition, a sine qua non of overall economic viability.
Not every country has the necessary resources or the flexibility for such long term economic planning. However, developing countries like Malaysia, Thailand, Indonesia, Brazil and India have shown that if well planned, a successful and diverse industrial base that has the ability to absorb shocks can be created. Being a mother industry, the presence of the automotive industry at the heart of these countries’ economic success, therefore, should not come as a surprise.
Since the trickle-down economic effects of the industry, through the creation of small and medium size enterprises (SME), are so beneficial that most countries have strived hard to attract foreign direct investment from established automotive industries around the world.
Pakistan has been successful in attracting investment in the automotive sector. The presence of over a dozen manufacturers in car, motorcycle, bus, truck and tractor sectors certainly serves as a vote of confidence. Industry players have generally evaluated the business opportunity on the basis of a large population, an unfulfilled transportation need and the government’s desire to create a competitive manufacturing base over the long run.
The latter is reflected through the government policy that is providing an enabling environment for indigenization. Obviously, the combination of continuity and regulation that ensures a level playing field will determine the ultimate success. However, if the results over last three years are any barometer for the future, the potential of the industry is clearly demonstrated in its growth.
The car and motorcycle segments have grown by over 50 to 100 per cent respectively. The trucks, buses and the LCV sector is having its best year in a while and the tractor industry has maintained its positive momentum. This growth has prompted established original ‘equipments manufacturers’ to bring forward investment plans in both in-house progressive manufacturing as well as part-making. Capacities are being increased and new investments contemplated.
Positive signals: The importance of sending out the positive signals to investors at this stage is important. Most existing players in Pakistan like Honda (Atlas), Toyota (Indus Motor), Suzuki, Yamaha (Dawood), Hyundai (Dewan), Massey Ferguson (Millat), Fiat (Al-Ghazi), Nissan (Biboji), Hino and some Chinese manufacturers have presence all over the world. They are aware of global competitiveness. When questioned on the long-term viability of the industry, they are unanimous on the need for Pakistan to have an automotive industry. Generally, the advice given to the government by investors is to think long-term and negotiate well at both the multilateral as well as bilateral forums.
They quote India as a good example. In 1990, at the height of the Indian economic crisis, the World Bank advised India to phase out its motorcycle industry on the basis of competitiveness. Fortunately for India, the advice was not accepted. Through a progressive localization strategy, the industry has now grown from a base of just 100,000 units then, to over four million units today.
While its industry is still not as competitive as some others, it has resolved to become globally competitive over the next five years. Korea and Taiwan provide similar success stories.
Pakistan stands today at a cross road. Volumes have begun to be generated in the domestic market and this is the time to communicate the right signals to trigger enhanced investment. For example, the tariff policy should be reinforced. The ban on reconditioned or smuggled vehicles should be strictly observed as well as dumping, underinvoicing, both in components, parts and completely built up (CBU) units.
For its part, the Pakistan automotive industry is already a significant contributor to the economy. Last year alone, the revenue generation exceeded Rs20 billion (5 per cent) of the total government revenue. The foreign exchange savings crossed $750 million and import substitution was in excess of $1 billion as shown in Table I.
While the assembly plants may represent the face of the industry, the heart firmly lies in the vendor industry. Over a 1,000 SMEs, supplying in excess of 10,000 parts daily, represent the supply chain feeding into the assembly plants. The total direct and indirect employment generated by the industry exceeds 300,000. With increased capacities coming on-line, the revenue, savings and employment figures are projected to double within a few years as shown in Table 11.
Vending industry: At this stage of development, it is important to reinforce several fiscal and regulatory measures in full spirit. The domestic auto industry can only be as competitive as the local vendor industry. The latter in turn has made great strides. Last year it exported parts valuing over $30 million.
However, the potential for parts volumes in the domestic market is being marred by the inability of the vendor industry to compete in the replacement market against smuggled and underinvoiced parts. Eighty per cent of the replacement market is being served by such spurious means. Since the replacement market is the real opportunity for generating part volumes, the vendor community is being deprived of the essential source of gaining competitiveness through economies of scale. It would be in the fitness of things to ensure competitiveness by imposing minimum value on imported parts, eliminating duty on the basic raw materials as well as imposing a higher duty on deleted parts.
Similarly, it is important that any distortion in the input costs at the assembly stage be checked. If smuggled or underinvoiced components find their way into regular production, an unfair cost advantage develops. Such distortions have recently come to light in the case of motorcycles and trucks. In the long term interest of the industry, it is imperative to ensure a level playing field and to check such activity in a timely manner before an unorganized sector plaguing various other industries becomes an issue in the automotive industry too. Suffice to say, that such problems have also arisen in other countries. However, the resolve of the host countries to tackle the issue has been such that those accused of malpractices or dumping have been taken to task. In fact, in some cases the outcome has been very positive.
China, for example, has decided to impose minimum export prices for certain products like motorcycles in order to safeguard its reputation as a responsible member of the world trading community. It is hoped that Pakistani authorities in turn will impose minimum import prices for various affected items in order to safeguard its industry as allowed under various trading regimes.
Policy: No doubt with increased volumes, the ability of manufacturers to introduce newer models will improve. Cost of introducing a new model tends to be high but with improved prospects, assemblers have already started to provide greater choice for customers. A positive development is that with improved volumes, the target to maintain prices (net of government levy) comparable to other regional players like India is being achieved.
In fact, net of levies the Honda City in Pakistan is slightly less costly than its comparable model recently launched in India. To be fair to the local industry, the notion of higher domestic prices must be removed. Since on average around 25 per cent of the retail price of an automobile is passed onto the exchequer, any regional price comparison must first neutralize the levy impact. Additionally, exchange rate differences must also be taken into account to make a fair assessment.
Throughout the world, no industry has grown without protection whether that industry had a competitive advantage or not. Even in the world of globalization, competitive advantage alone has not been a determining success. Hidden protection, access to markets and technology are still as much a barrier to entry as they were a decade ago.
In order to hedge their bets, developing countries with growing markets are therefore cautious in opening certain industries to freer trade. Unless fair trade can be ensured, the onus is still on the government to provide necessary support.
In this context, the Pakistani parts manufacturers are not only aware but are also determined in their resolve to lobby the government to ensure a consistent manufacturing-based policy for at least five years as being demanded in India. The commitments made at the WTO can still very much be negotiated. The ministry of industries is fully aware of the potential pitfalls and is playing a positive role in evolving a strategy to safeguard any adverse fall-outs. The assemblers have been communicated the government’s desire and policy.
Generally, the position is well understood; however ad hoc announcements from responsible functionaries that are generally contradictory to the stated policy goals tend to have far-reaching implications and bring into question the government commitment to the growth of the industry. This in the interest of the country must be avoided.
The potential: The automotive industry has the ability to play a central role in the development of the Pakistani economy. With an improved macro-economic situation, there is generally a positive mood amongst the industry players as to the long-term potential of the automobile sector. During the current year, the auto sector is the fastest growing sector in the economy. With interest rates at an all time low, consumer financing is proving to be the needed catalyst in helping the growth of the market.
In India, for example, 80 per cent of the vehicles on road are bought on some form of financing. In Pakistan, the figure is still around 40 per cent only. The upside is obvious. Such private sector financing is expected to also provide the motorcycle, LCV and tractors segments with similar increases in volumes.
As part of a broader engineering sector vision, an automotive industry road-map up to the year 2010 was prepared last year. The President himself has given it his blessings. It envisages a market for cars and motorcycles exceeding 200,000 and 700,000; new investment of over Rs35 billion by the OEMs and vendor community; revenue contribution of Rs50 billion and employment opportunity for over 500,000 people. Clearly, an important conclusion of the vision exercise was the focus on creating a manufacturing rather than an assembly-oriented automotive industry.
The thrust was on creating a level playing field at the time of granting sanctions - with protection for proprietary part drawings, provisions of technical back-up agreements as well as conditions for minimum foreign exchange savings. The suggested recommendations regarding quality, minimum investment in terms of facilities and amount will need to be implemented in their full spirit in order to promote a dynamic and growing automotive industry. Otherwise the potential of the automotive industry, the so very visible mother industry, will evaporate. In the current difficult socio-economic scenario, it is an opportunity that the country can ill afford to miss.